Hong Kong Issues Rules for Crypto Asset Managers

Hong Kong’s Securities and Futures Commission (SFC) has recently released rules and regulations for fund managers dealing with crypto assets.

The securities regulator published a 37-page document titled “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets” on October 4, 2019. It provided detailed guidance for entities managing portfolios that invest in “virtual assets,” its term for cryptocurrencies.

According to the document, virtual asset fund managers in Hong Kong should at all times maintain liquid capital at a minimum of 3 million Hong Kong dollars (roughly $380,000) and its variable required liquid capital. In addition, sufficient human and technical resources and experience are required, depending on the amount of assets under management.

As opposed to mainland China, where ICOs and exchanges providing cryptocurrency trading have been banned since September 2017, the securities regulator lays out a legal framework for ICOs.

Screenshot from “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets”

Ensuring Crypto Asset Fund Safety in Hong Kong

In order to ensure the safety of fund assets, the SFC requires the cryptocurrency fund managers entrust these assets to custodians that are functionally independent from themselves and that the virtual asset fund managers ensure their fund assets are segregated from their own assets.

Screenshot from “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets”

The detailed guidance seems to reinforce that the SFC is showing increasing openness and understanding toward cryptocurrency investment.

In October 2018, the then-chairman of Hong Kong’s SFC expressed that a total ban on cryptocurrency was not the right approach as it would not work in today’s digital world when trading can cross international boundaries. Since then the region has been leading the world in developing active measures to keep the fast-growing cryptocurrency sector in check.

In November 2018, the SFC issued guidelines for funds dealing with cryptocurrency, which determined that funds that invest more than 10 percent of the gross asset value in crypto assets need to be licensed by the SFC.